Some Things to Watch Ahead of Monthly Expiration

Last month’s expiration was a wild one.  Markets had been taking most expirations in stride, but last month’s was a so-called “triple-witch”: a quarterly occurrence when equity and ETF options expire alongside index futures and futures options.  During the lead up to that date we saw a bout of volatility.  In hindsight it was yet another short-term opportunity for traders to “buy the dip”, though I received nervous calls during those days.  Since markets tend to have short memories, here is a reminder:

5 Day Tick Chart for June 16^th – 22^nd, 2021 – S&P 500 (SPX, white, right scale) and NASDAQ 100 (NDX, blue, left scale)

Source: Bloomberg

We see that NDX led the declines on Wednesday of that week, while SPX followed suit on Friday even as NDX recovered somewhat.  An FOMC meeting on Wednesday and some intemperate comments by a Fed governor on Friday morning just ahead of the AM expiration of futures and futures options spurred the activity. By the following Tuesday, when other Fed governors made more positive comments, all seemed to be forgotten, as both indices recouped their losses.

As I write this, we are in the midst of the second day of Federal Reserve Chair Powell’s testimony before Congress.  Mr. Powell speaks carefully and stays on message meaning that even some eye-popping CPI and PPI numbers were largely taken in stride.   I offered the following comment to a publication yesterday: “The data-dependent Fed told us that for today at least we shouldn’t worry about the data”. As a result, while we have had some market gyration this week, the moves have been muted, as seen below: 

4 Day Tick Chart for July 12^th – 15^th, 2021 – S&P 500 (SPX, white, right scale) and NASDAQ 100 (NDX, blue, left scale)

Source: Bloomberg

It would be reasonable for one to expect that a regular monthly expiration would be far less significant than a quarterly expiration.  After all, there are 8 of them each year as opposed to 4 quarterly expirations, and there are fewer financial products disappearing.  One could also argue that there is little to differentiate the monthly expirations from the weekly expirations that occur on the other 40 weeks, since the most actively traded options all have weekly (or even thrice-weekly) expirations.  Yet the open interest in equity and ETF options is roughly on par with levels that we saw ahead of last month’s expiry: over 427 million contracts yesterday versus 450 million on June 17^th.  That means that going into tomorrow’s trading we still need to pay very close attention to contracts that are at or near strikes ahead of the close.

It is too early to get a real read on those strikes – I don’t propose to know where key equities and ETFs will be trading in an hour, let alone at 3 PM (Eastern) tomorrow.  But it is not too early for anyone to be trading options to scour their holdings for near-money strikes with high volume and/or open interest.  Those strikes have an uncanny way of becoming either magnets or accelerators as the underlying items approach the key levels, and it is never too early for people to be looking for those opportunities or pitfalls ahead of expiration.